Business Beyond the Reef

Hong Kong Trade Development Council

Exporters everywhere should take a look at a new report issued by the Hong Kong Trade Development Council, entitled “Impact of the Current Global Financial Crisis on World Trade Structure”.  Sounds like a snoozer, but it isn’t.

The report is intended to advise small Hong Kong exporters on what to do to recover from the recession, but the advice serves well for exporters anywhere.  The major conclusion is that you should keep your developed country markets if you can, but that the real growth to come is in developing countries.  For Hong Kong, of course, the prime developing country is China.  While the coastal areas of China are facing the drag of slow sales to their existing markets, inland areas of China are likely to see purchasing growth as a result of stimulus packages being showered from Beijing.  That’s not to say every exporter should rush headlong into China!  I’ll have a post up in the next few days about the difficulties HKTDC sees with selling in China.

After China, HKTDC advises Hong Kong’s exporters to look at emerging Asia.  Vietnam is highlighted as a likely fast-grower, followed by Malaysia, Indonesia and India.  HKTDC likes central and eastern Europe after mid-2010, but warns about Hungary.  Russia and the Middle East are attractive, with purchasing likely to increase as oil prices rise.  Mexico, Brazil and most of Latin America will tend to grow as the U.S. recovery gets into gear, but HKTDC cautions that Argentina may lag.

Perhaps not.  At least in Shanghai.

Is it real? No.

The South China Morning Post reports that Apple’s looming launch of the iPhone in China may be a disappointment.  Reporters explored a consumer electronics street market in Shanghai and found thousands of iPhones for sale.  Some of them were real.  The real iPhones had been smuggled in, but were being out-sold by “high-end” counterfeit iPhones, many of which come installed with the same software as the original.  The article reports speculation that there are already 2 million iPhones (real or otherwise) in use in China and that much of the market for the expensive gizmo has already been filled.  And, since the announced prices for “official” iPhones are higher than real ones smuggled in, sales prospects for the official iPhone launch are dimming.

There are several lessons here.  IPO enforcement is still too lax in China.  Apple needs a more aggressive pricing policy.  And trying to restrict iPhone usage to designated carriers is a futile strategy that has already backfired in China.

Sun Yat-Sen: Foreign Student in Hawaii

Not many of us think of education as an export industry, but we should.  Every time a foreign student signs up at one of our local schools, no matter what the level, that is a new export.  The balance of payments impact of foreign students counts just as much as if we had exported cement.  The impact in ideas and goodwill can last a whole lot longer.  And students are, for the most part, environmentally friendly.

To put things in perspective, Hawaii is not a major exporter.  The U.S. Bureau of the Census tells us that Hawaii exported about $960 million worth of hard goods in 2008.  That number is high because the data includes products that leave the United States through Hawaii, not just what is made here and exported.  If you back out products that are not really of local origin, Hawaii’s physical exports were probably a little more than $500 million last year.

Services are Hawaii’s real export strength.  Every foreign tourist on our beaches is an export success, and our architects and engineers are designing and building projects worldwide.  None of that shows up in the official export stats, but they are exports nonetheless.  Education exports have been under the radar, but that may change due to a new report issued by the State of Hawaii and the local chapter of the Association of International Educators (NAFSA).  I haven’t yet seen the full report, but the press release is here.

The bottom line is that more than 13,000 international students and their families spent $160 million in Hawaii during the latest academic year.  The top countries of origin (meaning our top markets) were, in order: Japan, South Korea, Switzerland, Taiwan and China.  Switzerland!  Somebody must have done some good marketing.

Three years back for my old radio show, working with NAFSA data, I came up with a back-of-the-envelope estimate that foreign students in Hawaii brought at least $50 million annually to our local economy.  I am sure the new report did it in more detail, but I suspect we are seeing an awesome growth rate.  At minimum, the new report demonstrates that Hawaii has a major export industry it did not even know it had!  Perhaps we should think about how to help it along.

China and India have been rivals since at least the era of the Great Khans.  Most of the world defines their rivalry by border disputes in the Himalayas.  But their competition extends to the pursuit of resources, campaigning for foreign direct investment, trying to out-influence each other in world affairs, space programs, and – of course – trade policy.

Chinese Truck Parts?

Following up on my post last month about the rise of protectionism during the recession (see Broken Promises), it is worth noting that India is now the world leader in imposing anti-dumping duties against China.  Antidumping duties or safeguard duties have been imposed by India in the past few months on Chinese-origin sodium hydrosulphate (no, I don’t know what it is used for), aluminum foil, diethyl thio phosphorylc chloride (got me!), carbon black, truck parts and soda ash.  India is currently investigating whether to impose antidumping duties on Chinese penicillin, coumarin, barium carbonate, passenger car tires, weaving machines, SDH transmission equipment, viscose staple fibers and nylon tire cord.  India has also launched a countervailing duty investigation into Chinese sodium nitrite on suspicion of subsidies.  And India has banned imports of Chinese chocolate, milk and toys on safety grounds.  I’m sure each of these moves can be justified, but the pattern is disturbing.  Of course, if China is using dumping prices and subsidies to the extent India maintains, that’s pretty disturbing, too.

China has been more restrained in its trade measures viv-a-vis India.  Or perhaps Indian exporters haven’t been spending much effort on China lately.

A post earlier this month dealt with increasing outbound investment from China.  The occasion was a talk by Shanghai lawyer David Mao, who predicted that China’s outbound direct investment would soon surpass $90 billion a year.

Where Are They Going Next?

The October 28 issue of the South China Morning Post carries an article with what may prove to be confirmation.  Chinese firms nearly doubled their investments outside of China in the third quarter of 2009 (July through September).  For the quarter, they invested $20.47 billion in other markets, a spectacular 190% increase over the same quarter a year ago.  Chinese outbound investment was only $12.4 billion for the first half of 2009, so the third quarter performance raised the total for nine months to $32.87 billion.  That’s quite an acceleration.  At this pace, Mao’s prediction should come true in 2010.

State-owned firms, especially, have ready access to foreign exchange and are being encouraged by Beijing to invest overseas.  Outbound investments in 2009 have been made in 112 countries and have emphasized resource acquisition, as well as banking and other financial services.  Commentators interviewed by SCMP said such outbound investment could continue for years, perhaps a decade or longer.

Politicians have been looking in all the wrong places to find the first “green shoots” for the economy (world or national, it doesn’t matter).  The real green shoot indicators are when reserve banks start to tighten rather than ease, and when shipping rates begin to turn up.  We may be seeing that.

Green Shoots in Hawaii

DryShips reported better than expected earnings this morning.  While revenues are still considerably down from a year ago (which is to be expected), earnings were significantly above expectations.  DryShips cited increased drill rig returns and lowered costs among the reasons, but the tell is that the company also highlighted improved spot market charter rates.  That is a “green shoot” for expanding cargo demand.  Watch to see what happens with other shipping companies, and also with railroad traffic.

Almost simultaneously, the Reserve Bank of India raised its bank liquidity ratio, which amounts to a reserve requirement that limits how much money an Indian bank can lend.  This is a small, but first step towards tightening India’s credit market, something that would only be done if the central bankers felt their economy was on the way back.  Another “green shoot”.  This is on top of Australia’s recent increase in interest rates.  And Norway is widely expected to raise interest rates tomorrow morning.  Something is happening, and I think it is good.

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Apparently not.  While the Obama Administration has taken heat for being slow to nominate political appointees for top jobs in Washington or ambassadors going overseas, the real hold-up has been the U.S. Senate.  Take a look at some of the top trade-related positions.  The White House nominated Miriam Sapiro to be Deputy U.S. Trade Representative (with responsibility for the World Trade Organization and negotiations with Europe and the Americas) on April 20.  The same day, Francisco Sanchez was nominated as Under Secretary of Commerce for International Trade.  Lael Brainard was nominated for Under Secretary of the Treasury for International Affairs even earlier, March 23.  Thomas Shannon was nominated June 1 to serve as Ambassador to Brazil, not an insignificant trading partner.  Still more positions are filled only on an acting basis, such as the Director General of the U.S. Commercial Service.

Having such positions filled for a while on an acting basis is not a bad thing.  The people doing the jobs are generally highly competent professionals.  But they don’t necessarily have the ear of the political appointees further up the chain of command, and they may be reluctant to take decisions that may or may not be in line with what the Administration wants.  They are also not likely to be able to fight effectively for budgets without political support.

Obama’s nominees have been in limbo for up to six or seven months.  Isn’t it about time decisions were made in the Senate?

I was at a business dinner the other night, sitting with a banker, an accountant and an exporter (sounds like the start of a joke, doesn’t it?).  We got to talking about exchange rates and the decline of the dollar in recent months.  Then the others asked me if the U.S. dollar would remain a reserve currency for much longer.

The conventional wisdom seems to be that a cabal of countries (China is always named) will combine to take the U.S. dollar off its perch as top reserve currency.  I disagree.  The United States has so much that the rest of the world wants to buy that there will be strong demand for the dollar for many years to come.  And, even though America still has a lot of recovering to do, recovery will happen and the country will remain attractive to foreign investment.  I think it is far more likely that the dollar will remain a reserve currency, but that it won’t be the ONLY such currency.  A lot of what we see today is the result of other countries becoming economically stronger, while America remains a strong, viable economy.  A natural result will be for countries to hold a diverse mix of currencies in rough proportion to the markets with which they trade.  The dollar will be a strong part of that, and probably the largest part.

Ambrose Evans-Pritchard, international business editor of the London Telegraph, has a blog post up in which he parallels my thinking, but goes further.  The title of his post says it all: “Dollar Hegemony For Another Century“.  He makes a cogent argument that the dollar will share its reserve currency status with the Chinese yuan until about 2030 – and then will come back strongly as the world’s leading reserve.  He has some interesting arguments involving demographics in China and Japan, a looming financial crisis in Japan, and American productivity.  His conclusion is that the U.S. dollar may be stronger at the end of the century than at the beginning.

And now for another sort of Business Beyond the Reef.   Pacific islanders have raced their outriggers against each other for centuries, but modern outrigger racing got its start in 1908 when the Outrigger Canoe Club and Hui Nalu teams were formed in Hawaii.  The sport really hit its stride after World War II and has expanded ever since.  The epicenter is still Hawaii, but there are very strong paddling programs in French Polynesia, Australia, California and many other places.  Outrigger races can be found in Brazil, Italy, Hong Kong and the recent Molokai Hoe (the Super Bowl of the sport) even had a team from Russia.  So, it shouldn’t surprise that we were racing in Vegas this weekend.

Outriggers on Lake Las Vegas

Las Vegas has the largest Hawaiian population outside of Hawaii and is often referred to as the 9th island.  Every fall there is an Hawaiian festival at Lake Las Vegas (yes, there is water) and the paddling regatta is the centerpiece.  I’m part of a rowdy bunch from Oahu sponsored by a small company called “Hawaiian ‘Nuff Said”, joined this year by Hawaii Air Cargo (see, there is a business angle to this post).  Our team is unusual in that it is built around its “masters” paddlers (50 or older), though we have teams of all ages.  We have been the overall winner of the Vegas regatta twice.

My own race was a catastrophe.  This was a sprint of  perhaps half a mile with four boats.  We got a slow start (largely my fault as I sit in the first seat and set the pace), but made up some of the lost ground on the first leg of an out-and-back course.  We had a super turn, coming out in 2nd and gaining.  Then, we felt ourselves get pushed sharply to the right, almost ending up in the marshes at lakeside.  The 4th place boat had hit the 3rd place boat, who in turn hit us.   Chaos and we finished last.  Business Beyond Belief.

I have never made money trading gold,  but surely selling ingots in a department store marks some sort of top?

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